In Franklin Savings Bank v. Bordick, issued on February 29, 2024, the Law Court reversed a decision of the Business and Consumer Docket (BCD) and remanded a personal property recovery judgment for further analysis regarding the nature of the loan—specifically, whether it was advanced primarily for consumer or commercial purposes. 2024 ME 17, ¶ 3. In doing so, the Law Court offers guidance as to the proper classification of business versus personal loans.
Background
The Bordicks obtained a loan from Franklin Savings Bank secured by both personal property (a hunting cabin owned by the Bordicks) and real property (an assignment of the Bordicks’ leasehold interest in the real estate upon which the cabin was situated). Id. at ¶ 4. Thereafter, the Bordicks defaulted on their obligations and the bank sought to repossess the hunting cabin through a summary action to recover personal property pursuant to 14 M.R.S. § 7071. The case was transferred to the BCD, which held a hearing and entered judgment for the bank for possession of the cabin. Id. at ¶¶ 5, 8.
As an affirmative defense to the bank’s claim for possession of the cabin, the Bordicks argued that the bank had failed to comply with loan disclosure requirements of the federal Truth-in-Lending Act (TILA), as made applicable under Maine law pursuant to the truth-in-lending provisions of Maine’s Consumer Credit Code,
9-A M.R.S. § 8-504(1).
Conceding that the TILA disclosures were not provided, the bank argued that TILA did not apply, as the debt stemmed from a commercial loan, exempt from disclosure requirements under 15 U.S.C. § 1603(1) (providing that the TILA disclosure requirements do not apply to “[c]redit transactions involving extensions of credit primarily for business, commercial, or agricultural purposes.”). Id. at ¶ 7. The lower court agreed.
In reaching its decision, the BCD looked only at the four corners of the loan documents and excluded extrinsic evidence. It did so by construing Bordetsky v. JAK Realty Tr., 2007 ME 42, 157 A.3d 233, to “preclude. . . review of any evidence outside the loan documentation to determine the purpose of the loan.” Id. at ¶ 8. The Bordicks’ loan documentation purported to be a commercial loan; accordingly, the lower court looked no further before concluding that the loan was exempt pursuant to § 1603(1) of TILA.
On appeal, the Law Court held that, by focusing only on the language of the loan documents, the BCD had applied the incorrect test in analyzing whether the bank’s loan to the Bordicks was a commercial loan exempt from TILA’s disclosure requirement pursuant to § 1603(1). Because the language of the loan documents was just one of several relevant factors to be considered in applying the correct test identified by the Law Court, the Law Court concluded that the BCD erred in excluding extrinsic evidence. Id. at ¶ 20.
Accordingly, the Law Court instructed the BCD to, on remand, “conduct a totality of the circumstances review by considering all relevant evidence and factors.” Id. at ¶ 3. In addition, the Law Court considered whether the loan might independently qualify as exempt under § 1603(3) of TILA but concluded that it did not. Id.
Admissibility of Extrinsic Evidence and Application of 15 U.S.C. § 1603(1)
Reviewing the BCD’s exclusion of evidence de novo, the Law Court found that the BCD’s reliance on Bordetsky was misplaced because that case involved construction of a Maine statute, not a federal statute. Id. at ¶ 20.
Bordetsky involved Maine’s strict foreclosure demand letter statute, 14 M.R.S. § 6111. The Bordetsky court held that, in determining whether § 6111 applied to a particular loan, courts need not look at extrinsic evidence as to the purpose of the loan if the loan documents clearly state on their face that the loan was given for a commercial purpose as opposed to for consumer (family or household) reasons. 2017 ME 42, ¶¶ 2-3, 157 A.3d 233.
Because the loan document at issue in Bordetsky unambiguously stated that the loan was “for business and commercial purposes and not for personal, household, or family purposes,” the Law Court “held that no extrinsic evidence should have been admitted” and the lender was excused from the notice requirements of
§ 6111. Id. ¶ 19 (citing Bordetsky at ¶¶ 10, 13.)
Like the loan document at issue in Bordetsky, the promissory note in Bordick stated that the loan was “primarily for commercial purposes.” See id. at ¶ 20; n.5. But the Law Court considered the context within which the BCD was asked to evaluate the purpose of the Bordicks’ loan (i.e., applying TILA) to be materially different from the context within which the purpose of the loan at issue in Bordetsky was analyzed (i.e., applying a Maine statute). Id.
In place of Bordetsky, the Law Court cited Moore v. Canal Nat’l Bank, 409 A.2d 679, 683 (Me. 1979) where it found that in construing TILA, “great deference should be given to the Official Staff Interpretations under TILA”. Id. After considering the Official Staff Interpretations, the Law Court concluded that the language of a loan document alone—even if unambiguous—is not necessarily decisive as to the nature of a loan for purposes of applying § 1603(1) of TILA. Id.
The Law Court noted that the Official Staff Interpretations illustrated that the text of the loan documents was just one of several factors to be considered in analyzing whether a loan was made primarily for commercial purposes such that it is within the scope of § 1603(1) and exempt from TILA’s disclosure requirements. Id. By failing to consider these factors, and excluding evidence potentially relevant to their consideration, the Law Court concluded that the BCD erred. Id.
By pointing to the Official Staff Interpretations of TILA, Bordick highlights five factors set forth in the Staff Interpretations that must be considered in evaluating whether a loan is covered by TILA. The factors (paraphrased below and followed by illustrative commentary as to their application quoted from the Staff Interpretations) focus on the extent to which the loan is used for business as opposed to family and household purposes.
- The relationship between the borrower’s primary occupation and the loan. (“The more closely related, the more likely it is to be business purpose.”)
- The relationship between the borrower and the management of the loan proceeds. (“The more personal involvement there is, the more likely it is to be business purpose.”)
- The amount of any income being derived from the benefits of the loan proceeds as compared to the borrower’s total income. (“The higher the ratio, the more likely it is to be business purpose.”)
- The size of the loan. (“The larger the transaction, the more likely it is to be business purpose.”)
- The statements in the loan documents. (“The borrower’s statement of purpose for the loan.”)
See id. at § 17 (citing 12 C.F.R. Supp. I to pt. 226—Official Staff Interpretations § 226.3(3)(a)(3)(i) (2023)).
Putting some judicial gloss on these factors, the Law Court suggested that, on remand, the BCD may consider it relevant that the “loan was a refinancing of a residential consumer debt and that there was no new money lent, just the payment restructure of an earlier loan,” or that the loan documents did not clearly state what business the loan was to benefit. See id. at ¶ 7. Following on that logic, other factors the BCD might consider could include whether and to what extent the Bordicks may have received rental income from the hunting cabin.
Exempted Transactions: 15 U.S.C. § 1603(3)
After briefing and argument had concluded, the Law Court asked for supplemental briefing on the applicability of a separate exemption set forth in §1603(3) of TILA relating to certain types of credit transactions. It appears likely that the BCD had not reached this issue because it had already found the loan exempt under §1603(1). In anticipation of the possibility that the BCD might conclude that the exemption set forth in § 1603(1) does not apply after considering factors other than the language of the loan document, the Law Court considered whether the loan might fall within the scope of § 1603(3). The Law Court first considered the plain language of the § 1603(3), which reads:
Credit transactions, other than those in which a security interest is or will be acquired in real property, or in personal property used or expected to be used as the principal dwelling of the consumer and other than private education loans (as that term is defined in section 1650(a) of this title), in which the total amount financed exceeds $50,000.
15 U.S.C. § 1603(3).
Where the loan in Bordick was secured by real property (a leasehold interest in the leased land upon which the Bordicks’ hunting cabin was located), the Law Court concluded that the exemption did not apply. The court rejected the bank’s argument that the exemption applied because the Bordicks did not occupy the hunting cabin as their primary residence—in other words the hunting cabin was not “used or expected to be as the principal dwelling of the consumer.” 15 U.S.C. § 1603(3). Bordick, 2024 ME 17, ¶ 3. The Law Court supported its reasoning by again referring to Official Staff Interpretations of TILA, which the Law Court read to construe the statutory clause “used or expected to be as the principal dwelling of the consumer” to refer only personal property, not real property—its intent being to safeguard mobile home occupants. Id. Thus, the Law Court reasoned, “[b]ecause the Bordicks’ credit transaction with the Bank was secured with real property, it does not matter that the property was not their principal dwelling, and the credit transaction is not exempt from TILA under § 1603(3).” Id. at ¶ 28.
Summary
Bordick clarifies the limitations of two important exemptions to TILA’s disclosure requirements made appliable under Maine law. First, Bordick tells us that section 1603(3) of TILA does not apply to real estate loans over $50,000, regardless of occupancy. Second, Bordick provides that a court can and must consider evidence beyond the language of the loan documentation to determine whether a loan is a commercial loan exempt under § 1601(1). That is, unambiguous language in a loan document reflecting the parties’ agreement that a loan is intended for commercial purposes cannot be considered decisive proof that the loan is exempt from TILA’s disclosure requirement. Countervailing extrinsic evidence that a loan served a consumer purpose may prevail over the written words.
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